
Market Temperature: Nippy
Adios, Au Revoir, Farewell 2009. (And
Good Riddance!)
By
Audra M. Szollosy
At the start of 2009, agencies were at a crossroads, not
knowing whether to buy, sell or implement new or improved
organic growth strategies. The path was uncertain, but it was
widely believed M&A activity would continue at a brisk pace
throughout 2009 as it did in 2008.
Instead, announced transactions were at the lowest levels in
six years and the second least active of the decade. Total deal
count was 185 compared with 307 in 2008, a 40% decline. As
expected, both public and privately held brokerages continued
to lead consolidation efforts with 131 deals. Trailing far
behind were insurance and financial service companies, with
just 33, and banks, with just 21—the lowest in 10
years.
Brown & Brown, which has historically been the most
active acquirer each year, was surpassed for the first time
since 2000 by Arthur J. Gallagher. The top six most active
acquirers were Gallagher (11), Hub International (9), Brown
& Brown (8), Marsh & McLennan (7), and—tied for
fifth place—(6 each) Wells Fargo Insurance Services and
Ascension Insurance. These six brokerages accounted for 25% of
M&A last year.
Buyer demand picked up in December with 25 deals, but it was
weak all year for five main reasons:
- Uncertainty about the economy
- The threat of nationalized healthcare
- Instability in the credit markets
- Bank focus on strengthening balance sheets and increasing
stock prices
- Lack of capital and increased cost of debt, which reduced
private equity group activity.
Another factor affecting M&A was transaction valuation
multiples. Valuations fell from 2008 and created a significant
valuation gap between buyers and sellers. Many sellers took a
wait-and-see approach, waiting for valuations to increase and
seeing if a buyer would pay their asking price.
Clearly, the threat of nationalized healthcare and the
broader prospect of overall healthcare reform greatly affected
acquisitions of employee benefit agencies. There were 43
benefits deals in 2009 versus 99 in 2008—a decline of
57%. Some buyers completely took a pass while others cautiously
moved forward with deals in the works.
January is typically a very active month, but average
activity stayed the course with 16 deals. Insurance brokerages
accounted for 15. For the most part, banks will play a minor
role in brokerage consolidation going forward, with the
exception of Wells Fargo and BB&T.
Not all is dim, as the outlook for 2010 M&A activity
looks rosy. Buyer demand and seller supply should both increase
as the economy improves and answers surrounding healthcare
reform become clearer. The valuation gap should narrow as
valuations increase slightly and sellers better accept and
understand current valuation multiples. The transformation of
the healthcare distribution model, a pending rise in the
capital gains rate, the ever-increasing age of the average,
independent agency owner, and the inability to perpetuate
internally, along with several other variables, will continue
to drive consolidation.
Recent Mergers & Acquisitions Action
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